Price formation around historical highs in retail-dominated stock markets: Evidence from Taiwan

ShaoChen Lee and Robin K. Chou

Pacific-Basin Finance Journal, 2025, vol. 93, issue C

Abstract: How does market structure affect price formation around psychological barriers? While the research has found negative returns when stocks approach historical highs in institutional-dominated markets, the effect of such price patterns in retail-dominated markets remains unexplored. We use data from Taiwan's stock market in which individual investors account for 74 % of the trading volume to examine how their composition and the market structure influence return patterns around historically high prices. We find that when stocks exceed historical highs, they trigger a shift from overreaction to underreaction. This shift yields positive returns. This effect is particularly pronounced for small-cap stocks with larger retail ownership in which investors' level of sophistication plays a crucial role in price formation around psychological barriers. The effect varies systematically with trading volume and manifests a strong seasonality, with returns concentrated between November and April. Our findings show how the market structure affects the relationship between historical highs and future returns. This finding extends our theoretical understanding of price formation and provides practical insights for investment strategies in emerging markets.

Keywords: Asset pricing; Behavioral finance; Empirical evidence in financial markets; Financial decision-making; Investments; Historical highs (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25001908

DOI: 10.1016/j.pacfin.2025.102853

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